Union Pacific’s (NYSE: UNP) stock price grew 80% from around $100 levels in Q1 2017 to around $180 currently. This rise was primarily driven by net income margin growing 28% over this period, driven by a slower expenses growth. Additionally, the company’s top line has also expanded due to healthy growth in industrial and intermodal freight. We break down the movement in Union Pacific’s stock price into four factors: growth in revenue, change in share count, expansion in P/E multiple, and change in net income margin. You can look at our interactive dashboard analysis on Union Pacific’s stock price growth for more details.
#1. Revenue Growth
- Revenue growth of about $328 million in 2020 to be driven by about $234 million growth from Industrial, $155 million from Premium & Other, $89 million from agricultural, offset by $149 million decline from energy.
- Energy revenue has declined over the recent past to $3.8 billion in 2019, and it is estimated to decline to $3.6 billion in 2020. The decline in Energy revenues can be attributed to coal, due to favorable natural gas prices, resulting in lower demand for coal as a source of energy. As such, the shipments and pricing for railroad companies have been impacted, and this trend is expected to continue in the near term.
- Industrial revenue has been on a rise, and we expect this trend to continue in 2020, led by growth in the overall U.S. economy, and industrial production.
- Premium & Other revenue, which includes the company’s intermodal and automotive shipments, was impacted by the increased trucking capacity in the U.S. and a tough comparison from 2018, where the trucking industry faced capacity constraints. Going forward, Premium & Other segment should steady growth.
- Look at our interactive dashboard Union Pacific Revenues for more details in the company’s revenue and performance.
#2. Net Income Growth
- A sharp rise in 2017 was driven by one-time tax benefits due to the TCJ Act. We expect net income to grow slightly to $6.0 billion in 2020.
- Union Pacific’s net income grew from $4.2 billion in 2016 to $5.9 billion in 2019.
- This can be attributed to higher revenues and elevated margins.
- Net income margin increased from 21.1% in 2016 to 50.4% in 2017. This was followed by a drop to 26.1% in 2018 and a rise to 27.3% in 2019.
- We discuss the factors that impacted the margin in the section below.
#2.1 EPS Growth
- EPS has risen steadily over the years from $5.07 in 2016 to $8.38 in 2019.
- The EPS spiked to $13.36 in 2017 due to the impact the TCJ Act as highlighted above.
- We expect the EPS figure to further increase to $9.25 in 2020.
- Shares outstanding have declined from 835 million in 2016 to 650 million in 2019, due to the company’s approved share buyback plans.
#3. P/E Multiple expansion
- P/E multiple for Union Pacific has been volatile over the years, but it is higher than what it was in 2016.
- Union Pacific’s P/E multiple expanded from 20x in 2016 to 22x in 2019.
- This compares with Norfolk Southern, which saw its P/E multiple expand slightly from 19.5x to 20.0x, while CSX’s P/E multiple declined from 24.2x to 18.5x over this period.
- The current P/E is also higher than that for its peers Norfolk Southern and CSX. The decline in 2017 can again be attributed to higher GAAP EPS reported due to the tax adjustments.
- Note that P/E multiples are calculated using average stock price in Q1 of given year, and GAAP EPS for the trailing full year.
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